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Portfolio > Economy & Markets

Brexit’s Inevitable Impact: Lower Equity Valuations—Searching for Alpha for July 2016

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Last week’s decision by the U.K. to leave the European Union is the first real step away from globalization since the end of World War II. It will have significant ramifications across the pond. Fortunately, it shouldn’t be enough to push the U.S. into a recession.  

Nonetheless, it is inevitable that Brexit will result in lower equity valuations. 

Notice that I didn’t say lower stock prices. Earnings could conceivably increase enough to offset the global disorder created by Brexit. But I can’t see how stocks will be able to maintain their lofty valuations. Increased uncertainty – both politically and economically – lie at the heart of my view. 

We’re in uncharted waters, which make earnings harder than usual to predict.

Corporate debt seems to be the best bet going forward. Thanks to Brexit there is virtually no interest rate risk, and if credit spreads get wider both high yield and better quality bonds would be attractive. A diversified approach is recommended to avoid defaults, which are on the rise. 

Even so, debt will likely generate a higher risk-adjusted return than equities, assuming Brexit actually occurs.

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